Perspectives Weekend Edition - Nov 19
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Commentary
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The concepts of support and resistance are among the most important in
technical analysis. They represent psychological barriers that can impede a
stock’s move, but can also be utilized to anticipate new information. When
making a visual assessment of a stock chart, a solid understanding of
support and resistance can help investors determine entry and exit points
for profitable trading.
Simply, support is a floor price that the market for a stock has shown a
hesitation to break through in the past. The more times a stock touches
this floor price, the stronger the support is said to be. It can be defined
by a low point in trading, or by a period of price consolidation.
It is not uncommon for support prices to occur at even dollar values, as
these tend to be psychological barriers for market participants. The longer
the time period that the level of support has held up, the more important
it is. Stocks that penetrate strong levels of support often head lower.
Defining support is relatively simple. Looking at the stock chart, find
areas where the stock has trade sideways for a period or, a low point in
recent trading. If the stock has pushed the floor price on numerous
occasions, then that level of support will be strong as it holds greater
significance in the memories of investors.
>From an investor’s standpoint, the level of support can serve as an exit
point from a long position, or an entry point for a short position. If a
stock penetrates a support level after a period of consolidation and
general pessimistic trading, it often heads lower. Owners of stocks that
are testing support should be wary of the downside risk that is evident,
and may want to exit the position if that support level is violated. Short
sellers should look at these situations as an opportunity to make a
successful trade on an abnormal downward move.
As a caveat, however, it should be recognized that support often serves as
a potential reversal point for negative market psychology. If a stock is
undervalued, it often bounces off of support and reverses a downtrend.
While this can happen, it is more the exception than the rule. In these
situations, be sure that the bounce actually breaks the market’s pessimism
and is not just a feeble attempt to dissuade the inevitable downward trend.
Resistance is just the opposite of support. Instead of a floor price, it is
a ceiling that the market has shown an unwillingness to trade above. For a
stock to break through resistance often requires a dramatic shift in
psychology, often brought by positive new information.
To find the line of resistance, look at the stock chart and seek out high
points or trading ranges. High points provide an upper limit of value for
the stock, and trading ranges define an area where the market had a strong
consensus on the value of the company. As with support, the more often a
stock touches the line of resistance, the stronger that ceiling is. Again,
resistance often forms at even dollar values as they sit well in the minds
of investors.
Investors want to pay attention to a stock’s resistance point, because a
break through that point is often followed by an uptrend. Theoretically,
resistance represents the maximum the market is willing to pay for the
company. If the market becomes willing to pay more than that price, it is
often because there are new developments that make the company worth more.
Stocks that are trading near their resistance point have the potential to
show upside volatility as the market is showing expectations for new
information.
Stocks that come through with positive new developments are able to break
through resistance and go into uptrends. Those that don’t live up to the
market’s optimistic expectations often bounce off the ceiling price and
remain in the trading range. Legitimate breakouts are often combined with
an abnormal trading volume at the time of the breakout.
Understanding support and resistance is essential to becoming a successful
technical investor. They act as visible thresholds indicating the state of
market psychology. Breakouts and breakdowns are strong signals for
directional moves that should not be ignored. Experience in visual
assessment of charts and their levels of support and resistance will help
determine exit and entry points for investors.
Scores of Friday's Most Active Stocks
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* to calculate a score, 200 days of trading data is required. Those that do
not have sufficient trading data will show an n/a.
NASDAQ
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Company Symbol Stockscore
Microsoft MSFT 32
Qualcomm QCOM 75
Intel INTC 66
Cisco Systems CSCO 78
Sun Micro. SUNW 87
US Over the Counter Bulletin Board
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Company Symbol Stockscore
Socket Commun. SCKT 65
Scient. Soft. SSFT 70
FutureLink FLNK 70
Trikon Tech. TRKN 65
Ebaseone EBAS n/a
Alberta Stock Exchange
======================
Company Symbol Stockscore
Off-Site Data OS n/a
RightsMarket RTS n/a
Cell Loc CLQ 57
Book4Golf BFG n/a
Visualabs VLI 66
Vancouver Stock Exchange
========================
Company Symbol Stockscore
Unique Broad. UBS 69
Wave Telecomm. WV n/a
WSI Interact. WIZ n/a
Global Invest. GIV n/a
Telelink Comm. TCC 55
Toronto Stock Exchange
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Company Symbol Stockscore
Nortel Network NT 87
Macmillan Bl. MB 40
BCE Inc BCE 98
Imasco IMS 50
TD Bank TD 65
Stocks to Watch
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I-Party (IPTY)
OTC BB
Stockscore - 67
Rating - Optimistic
Reference - www.iparty.com
- word is that the guy who promoted Wi-Lan is going to begin working on
this stock next week, along with numerous other promoters as they push the
stock higher to meet the listing requirements of the AMEX. I-Party wants to
list there so they can go after larger investors as they build their
business. Very impressive board and management, this company intends to
become the premier brand in the on-line party industry and the leading
resource on the Internet for consumers seeking party goods, party services,
party planning advice and information, and personalized video greetings
called "Star Greetings" from celebrities. Market activity on Friday
indicates that something is going on so I think IPTY is worth looking at.
Check out the bios on the people behind this deal from their web site.
Applied Gaming Solutions (AGC)
ASE
Stockscore - 42
Rating - neutral
Reference: http://www.ags.ca
- a stock I have been following for a long time, AGC announced some pretty
positive news this week. The Vietnamese government has asked the company to
set up an Internet system to sell their lottery tickets. The backing of a
sovereign government gives a lot of credibility to an Internet lottery, and
presents pretty good potential for revenues. I expect there is more good
news coming out of this company, it looks like a good bottom fishing candidate.
Microsoft (MSFT)
NASDAQ
Stockscore - 32
Rating - caution
Reference: http://www.microsoft.com
- unless you have just fallen off the turnip truck, you are undoubtedly
familiar with Microsoft and the market share that they have in the computer
business. The pursuit of the US government to break their monopoly has
taken MSFT share prices lower while the rest of the tech sector has been
performing great over the past month. It looks to me that MSFT may have
found its short term bottom and we could see a bounce back next week. Good
chance we'll see it come back in the short term although the longer term
outlook is still a bit bearish. Traders should consider it.
Unique Broadband Systems (UBS)
VSE
Stockscore - 69
Rating - Optimistic
Reference: http://www.uniquesys.com
- UBS continues to be the most active stock on the VSE, but as I suggested
last weekend, the stock has pulled back this week. My call then was for the
stock to sell of to the $0.95 range and we are still not there, having
closed at $1.14 for the week. I still think we can see a test of the $1
level before a bounce comes. Longer term, the stock has potential, but with
euphoria comes profit taking. The company is involved in the design,
manufacture and marketing of wireless broadband solutions for broadcast and
telecommunications industries.
Trident Microsystems (TRID)
NASDAQ
Stockscore - 98
Rating - Bullish
Reference: http://www.tridentmicro.com
- Trident announced today the world's first single-chip digital television
video processor, the DPTV. Market seemed to be pretty impressed because it
sent the stock to a new high. Technically, the breakout to new highs on
strong volume is very positive technically, making this stock worth looking
into. Looks like it could outperform the broader market in the near term.
The Scores - What They Mean
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***The scores that are attached to the stocks are based on a proprietary
model developed by Stockscores.com. This model factors in numerous
technical analysis indicators and utilizes the past 200 days of trading
data. Stocks that have not traded for 200 trading days will not have a
score calculated.
Scores greater than 70
Bullish
This stock is worth considering as a buying opportunity. Our model
indicates that the stock has good potential to go higher in the short term,
and is worth taking time to consider. Complete your due diligence on this
stock so that you can make your own judgement on the quality of the company
before making a decision, and remember that our score is valid for the
price that the stock is at when we applied the score. Of course, a score of
98 has more potential than a score of 72, but all stocks in this range
deserve your consideration. In addition, if you are short this stock, you
should consider covering the short position.
Scores between 60 and 70
Optimistic
Market activity is beginning to indicate improved optimism for this stock
and it should be put on a watch list as a stock to consider. If you already
like this company's fundamentals, you should now look for the signals that
the time is right to own the stock. If you own the stock, you are likely in
good shape but may want to consider taking profits if profits are high. If
you are short the stock, you should approach your position with some
caution and watch for the signal that it is time to cover.
Scores between 40 and 60
Neutral
Market activity is doing little to indicate the future direction of this
stock. The stock is likely in a trading range, or, if it has been in a
strong trend over the recent past, it may be starting to reverse that
trend. If you own this stock and are in a profitable position, you should
consider whether the stock is reversing and it may be time to take your
money off the table.
Scores between 30 and 40
Cautionary
Market activity is beginning to indicate caution is warranted for this
stock and it should be put on a watch list as a stock to sell or short. If
you believe that the company's fundamentals do not warrant the valuation
the stock has received, you should now look for the signals that the time
is right to short the stock. If you are already short the stock, you are
likely in good shape but may want to consider taking profits if profits are
high. If you are long the stock, you should approach your position with
some caution and watch for the signal that it is time to sell.
Scores less than 30
Bearish
Market activity is very negative on this stock and it may be very risky to
hold this stock. Shorting opportunities should be explored after doing the
appropriate due diligence. If the stock has suffered a major sell off
already, traders may want to watch for signs of a reversal bounce as a long
trading opportunity, but be sure to watch for the technical reversal which
will likely be accompanied by an increase in the stock score.
As a final thought on this new scoring system, it is important to consider
where the score has come from. A stock that moves from 60 to 75 is likely a
better opportunity than one that moves from 90 to 75. Also, consider where
the stock is relative to the score. Again, a stock that has made
considerable gains of late may have a good score, but entering the stock
given the gains it has made will be riskier. Risk is factored into the
model, but use some of this common sense.
Finally, remember that this model is generated by a computer and should not
be used to make investment decisions. It is a tool which can help you find
opportunities from the thousands of stocks that are out there. However, you
have to do the work to take the list of stocks with the scores you want
down to the stocks you want to put your money on.
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